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Hyperinflationary Runaway


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#1 machinehead

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Posted 04 October 2003 - 06:26 PM

In Ike Iossif's interview with Doc and several Stoolies on Marketviews TV, I mentioned a speadsheet which modeled a hyperinflationary runaway. Here are the basic assumptions and the results.

The money supply is backed mostly by U.S. government debt. So to answer the question of what the Federal Reserve and GSEs are doing to the money supply, you have to look at what's happening with debt.

The story is rather amazing. The quarterly Flow of Funds report, which is posted on the Federal Reserve's website, indicates that there's $33 trillion (with a T) of debt outstanding in the U.S. economy.

To that $33 trillion of existing contractual debt, we should add the $44 trillion net present value of the federal government's future fiscal imbalance. That figure comes from the paper by Gokhale and Smetters, published by the American Enterprise Institute. Most of the imbalance comes from Medicare and Social Security. These are not contractual debts, but they are promises that our whole society is relying on, and there will be consequences if they aren't paid. In cash flow terms, they become burdensome when the Baby Boomers start to retire toward the end of this decade.

So adding up $33 trillion existing debt and $44 trillion future fiscal imbalance, you don't need a PhD in economics to realize that the total of $77 trillion (which is seven times annual GDP) is a hole that we can never get out of. Just the annual interest on that sum at 5%, to stop it from compounding and getting bigger, would be almost $4 trillion annually or 40% of GDP.

Well, obviously we aren't paying 40% of GDP to hold this obligation from getting bigger. We couldn't, because it would collapse the economy. So the $77 trillion obligation will continue compounding and getting bigger, until one day a cash flow crisis makes clear that it can't and won't be paid.

Going back to the $33 billion of contractual debt, about of that is government sector, is private households, and the other half is business (both financial and nonfinancial). But since government issues the money supply, government is the key sector to watch.

Due to the government's own debt problems, the potential exists for a hyperinflationary runaway. It starts with the fact that during the past 5 years, federal revenues have been growing only 1.5% annually, while expenditures grew 6.5% annually. That pushed a cash flow surplus into a $400 billion deficit this year. Obviously if you extend those trends linearly, the gap between them (= the deficit) grows ever wider.

But that's not the only factor to consider. The average interest rate on the nearly $7 trillion of federal debt has fallen to less than 5%, which resulted in an annual interest tab of about $300 billion in the fiscal year 2003.

As the outstanding debt inexorably compounds from the rising deficits, and as the Fed eventually raises T-bill rates above their current 1% yield, the interest cost will rise and become a larger percentage of the federal budget ... which engenders yet higher interest rates, higher interest cost, and an expenditure trend which accelerates beyond the 6.5% trend mentioned above.

Here's the actual result of one version of the spreadsheet:


(values in $ billions)
........................................Total...Int......Int......Int. as
Year......Recpt....Expdt....Deficit.....Debt....Rate.....Amount...% Expdt.

2004......1904.....2209.......-440......7244.....5.3%......383.....14.8%
2005......1985.....2581.......-596......7840.....6.0%......468.....16.5%
2006......2044.....2827.......-783......8623.....7.1%......613.....19.5%
2007......2128.....3144......-1016......9639.....9.1%......874.....24.4%
2008......2257.....3587......-1330.....10968....12.4%.....1360.....31.9%
2009......2469.....4267......-1798.....12767....18.2%.....2323.....42.7%
2010......2845.....5437......-2593.....15359....28.4%.....4363.....56.7%
2011......3567.....7697......-4130.....19489....46.3%.....9027.....71.7%
2012......5112....12596......-7484.....26973....76.2%....20613.....84.4%
2013......8866....24432.....-15566.....42538...121.8%....51797.....92.7%

*Interest amount in each year is included in the next year's expenditures,
to avoid circular cell references. "Close enough for government work." :lol:


As the interest amount becomes a larger portion of the annual expenditure, the interest rate rises. Laid on top of pre-existing structural deficits, the process becomes self-reinforcing. Higher interest rates make for bigger annual interest cost, which adds to the mountain of debt.

By the year 2012, the $27 trillion debt exceeds 150% of GDP (where Japan is now). Beyond that point, Treasury borrowing from the private sector becomes difficult. The next year's $15.6 trillion deficit is simply monetized by the Federal Reserve, sending interest rates soaring into hyperinflationary territory of 100%. From that point, the doubling of interest rates and inflation can compound monthly or even biweekly. Multi-octave logarithmic charts are needed.

Ultimately, that's the end game of the system. Rather than outright first-world debt default, the debt gets inflated away by a hyperinflation. The very real losses of the bondholders will wipe out the middle class, as occurred during Germany's Weimar inflation in 1923. At that point, the pieces are picked up and life goes on (austerely). Except that there's no non-U.S. entity big enough to bail out the U.S. So the deflationary Dark Age after the hyperinflation burns out could last for decades, or centuries.

As mentioned, I project the hyperinflation to occur by 2012. That happens to be 99 years after the Federal Reserve was founded in 1913, with its doomsday inflation machine. G. Edward Griffin's The Creature From Jekyll Island is the classic explanation of the Federal Reserve doomsday machine. This projection also coincides with the end of the Mayan calendar in Dec. 2012. So I'll project that 2012 is the year we blow out.

That leaves us with perhaps two more business cycles, before the final plunge into nightfall begins. :o
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#2 wndysrf

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Posted 04 October 2003 - 06:35 PM

Grab your wheelbarrows.......

Or grab some gold.....
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#3 Pere Ubu

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Posted 04 October 2003 - 06:39 PM

Grab your wheelbarrows.......

Or grab some gold.....


Or learn Chinese and move to China. :lol:

Great work. However, a decade is a very long extrapolation, the Mayan calendar notwithstanding. What, if anything, could prevent this scenario coming to pass?

If this comes to pass, the Rogers Raw Materials Fund sounds like a good place to be.
Comment?

#4 mjkst27

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Posted 04 October 2003 - 07:20 PM

friends don't let engineers drive spreadsheets :D :lol:

#5 Tchaikofsky

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Posted 04 October 2003 - 07:26 PM

So J6P was right all along? Borrow and spend all you can and party hearty since it won't matter in a few years? :huh:

#6 Sphinxter

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Posted 04 October 2003 - 07:55 PM

MH - not sure it's fair to call the interest expense the simple multiplication of that year's interest rate.

Certainly there are long-standing obligations out there (like this year's 10 year T-bones) that will temper the interest rate rise?

That would temper the Int. as a % of exp column, I would think, as well as the rest of the deficit growth.

I think the larger and more likely trigger for immediate interest rate growth is for China and Japan to temper thier purchase of US debt.

Oddly, it is a weak dollar that is now supporting weak bond yields due to the desperate round-tripping by our asian friends. Bizarre and without precedent in the annals of modern finance.

Eventually, Japan (and probably China) becomes the ultimate bag-holder and ends the practice as they belattedly realize that it is far cheaper and less risky to directly subsidize their failing banks and corporate institutions.

Just wait until that particular engine begins to run in reverse!

I think this point of recognition comes well before the time-frame of your spreadsheet can enact its mathematical woes.

Thus, all I'm proposing, in the end, is that I think we can boost the timeframe by a few years. :grin:

Got gold?

#7 Metamucil

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Posted 04 October 2003 - 08:16 PM

Nice stuff, MH.

Every country in a debt crisis gets around to first trying to borrow its way out of trouble...and then, when that does not work, it tries to spend its way out of the crisis. Finally, when even that doesn't work, it tries to print its way back to prosperity, by increasing the money supply.

The biggest economy in history is doing something truly new and amazing....it's trying all 3 failed strategies at once! HAHAHAHAHAHAHAHA.........

Off to the beautiful St. Andreas-related bluffs........to practice Mayan chants and then bang on African djembe drums :lol:
The ladies then perform 'the snake dance' :grin:
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#8 Hypertiger

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Posted 04 October 2003 - 09:17 PM

As soon as Woodrow signed over the USA you were in a hole you were never going to get out of...2012 so 9 years to pound the pooch...eh

So I spend a year talking about debt inflation and for what?

The only way to get hyperinflation is to create non debt backed money out of thin air and give it away for free...in massive quantities quicker and quicker in ever increasing amounts...period...

The US doomsday machine generates the largest amount of debt inflation on the planet... a lesser country goes down and as long as the US exists there is a source of liquidity to buy it when it gets cheap enough...like all the countries in the world that are being propped up... who is going to buy the USA?

How are wages going to increase? when are they going to increase?

Without wages rising there can be no hyperinflation period.

Rising interest rates? so let me get this straight rates have been dropping for 23 years an average of 83 basis points per year for that time and by some weird miracle they will begin rising without causing a collapse in debt volume which is fueling debt inflation? when now a rise of 1% on the 10 year sends people to pray in their basements and has the real estate freaks pissing their pants with blood...

Short term Debt is created at the top out of thin air by commercial banks at the request of the top at wholesale prices then marked up and sold long term to the bottom at retail prices...

At the same time the top is cutting wages and laying off? that won't last much longer...Unless the bottom starts getting a direct infusion of free money to use as leverage to service greater amounts of retail debt dumped on them by the top...

How do you refinance with rising rates? How do house prices keep rising if wages are not rising or are dropping?

Where does China get the debt dollars to buy treasuries if US consumers can not borrow as much any more? or refuse to borrow any more? Guess the fed will buy them all and the government will give the consumers raises or subsidize their wages...and the sell them to the Chinese...

In order to keep borrowing forever like we have been for the past 23 years then rates have to drop forever... prime and credit cards can only go so low and Federal funds is almost a wash...and zero is the end of the line...

rates rise and it is game over... 9 years X 83 basis points = -7.5%

why don't they raise rates now?

Consumers are the economy not the government or central banks... look out your window...see all those people crawling around like a kicked ant hill? They are the economy...

Everyone including the federal governmet is slashing costs, outsourceing, laying off, and cutting wages...

Consumers are borrowing to exist and they are being worn down becaue the top consumers are borrowing to survive also but depend on the bottom to be the bag holders and the servicers...

doomed doomed doomed...They better get mortgage rates down real quick...or a huge source of consumer debt will vaporise...

I love it... prices for commodities such as food, housing, and energy plus services like medical are rising at the same time massive job losses and wage cuts are taking place...I wonder whats happening? I'm confused...

And then we have the upper middle class clinging to the hope that they have 9 more years to suck society dry before it becomes their turn...I'm being mean sorry

It will be a laugh when the sports teams start sueing the owners to make good on their contracts and the money doesn't exist...to even pay the lawyers...

It will be funny watching the teeming masses arrogantly demand answers or crying why me? as they get herded into...

Burning pits of diesel...or worse.

The reason you can't see it is because you are not supposed to...that's the way it is designed...

If everyone could see it I wouldn't have to keep bringing it up...

The power of the just think positive inflation forever is powerful...

Just have to put up with me for 4-8 months more...
"We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money (at the request of the consumer) we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon." --Robert H. Hemphill, Atlanta Federal Reserve Bank,1938...

#9 wndysrf

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Posted 04 October 2003 - 09:45 PM

Hypertiger:

It appears that the Speculative Globe is still full of Mo-Mo Monkeys gunning for Nasdaq 7000 by the end of 2004 so they can sell to other Bagholders and play golf the rest of their life.

The Cosmic Joke is that Mo-Mo Monkey is really gaming a financial pyramid being supported by Buyers of Last Resort:

The Federal Reserve and Asian Central Banks.

Please explain how the Fed can continue to prop and print out of thin air, and Asians can prop and print out of thin air, without any adverse consequences......

So far, its working.......
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#10 Hiding Bear

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Posted 04 October 2003 - 10:01 PM

Nice summary - MH.

Earlier this week I posted on IDS a very honest appraisal of the budget outlook for the next ten years from the Concord Coalition. While it is also based on the "think positive" school of economic forecasting, and this coalition probably includes some matrix operatives, it does show continued increases in the deficit.

Then the really bad news hits about 2013 with social security payments and the cost of medical care paid by the government.

Unlikely that in 10 or 15 years the economy and the value of the $ will look anything like it does today. Either the $ will be almost worthless, or we will have machine gun toting enforcement soldiers telling us what to buy and how much to pay for it.

Developing Crisis[

#11 Hypertiger

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Posted 04 October 2003 - 10:05 PM

Yes if the world was one big game of sim city...If wages start dramatically rising I'll change my tune...

We will just wait and see 4-8 months and I can go on a vacation at the very least...
"We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money (at the request of the consumer) we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon." --Robert H. Hemphill, Atlanta Federal Reserve Bank,1938...

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Posted 04 October 2003 - 11:14 PM

MH, great post and spreadsheet.

In 2007, when interest of debt begins to take 24% of the budget, is also when it is estimated the boomers start taking social security en masse, which I believe is taken into account with the 44 trillion number.

What I find incredible is that we all know about this, and the washington elites all know about this. Yet it is getting absolutely no discussion at a national level. We are looking at a complete bankrupting of the country within ten years. What's the plan to deal with that? You'd think the media would be having a field day with this kind of information, with their penchant for doom and gloom reporting.

My take is that there is a plan, and we aren't going to like it very much. Remember all the new powers FEMA got a few years ago? It was all very hush hush. I doubt that any "electronic" forms of money are safe from confiscation.

#13 mjkst27

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Posted 05 October 2003 - 12:51 PM

Hyper's point is (as always) very difficult to overlook. Let's face it, there is one HELL of a lot of very old, very powerful, very big wealth out there...and it is mostly denominated in DOLLARS! These people absolutely do not have any interest in seeing the currency destroyed by hyperinflation. They would much prefer to see the middle class and the prollies destroyed by deflation in order to save the dollar (which would have very much greater buying power in a deflationary collapse) and by extension greatly reinforce their own material wealth. It would be very simple to implement - when at some point it becomes apparent that reflation has no traction, simply stop trying to reflate. Then develop a media campaign that subtly trains the middles and prollies to take personal responsibility for the collapse, that somehow it is their fault. Yes, foreigners wind up owning much of the US in such a scenario. Maybe that's what the elite planners want? :o

#14 Hypertiger

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Posted 05 October 2003 - 04:41 PM

It's possible that wages show signs of inflating enough but this version of capitalism that everyone seems to have fallen in love with is not patriotic or principled or anything it is almost absolute...pure absolute capitalism which is negative to society as a whole all the most immoral capitalistic techniques are being employed at all levels... lying cheating and stealing on a massive scale...propping this mess up only encourages this to grow more powerful and the end result is an acceleration of the destruction of the majority...It will crack, it is only a matter of time and it won't be years...I don't know why other than the mechanics of fractional reserve banking dictating what is happening... plenty of time and effort has been expended encouraging the destruction...almost everything that could be done to support... The "controlled disintegration" of the world economy implemented in 1979 by Paul Volker has been done and continues...
"We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money (at the request of the consumer) we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon." --Robert H. Hemphill, Atlanta Federal Reserve Bank,1938...

#15 HiHat

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Posted 05 October 2003 - 05:22 PM

mjkst27.........................................

I ...over the last couple of years have resolved
the inflation-deflation debate in my own mind thusly,..

That.. a GAME ...(Federal Reserve)..has a built in TIME
LINE ...ala Hypertiger...we are approaching END GAME.

IMO....that gives rise to only 1 question, WHO GAINS?

Who gains is a function of which segment of the socio-
economic order holds the balance of POWER.

Marie Antoinette verses The Rabble...................................

Hyperinflation is a made in Heavan solution for the Rabbles
indebtedness.........

Deflation enables the Banking, Oligarchic Elite to TAKE
delivery of what they de-facto own anyway..and U.S.
Government..is included in whats owned...........

In short with hyperinflation the top has everything to LOSE
in hyper-madness ....with deflation they attain the tangible
basis to resart a NEW game

I forsee that Marie Antoinette gets the cake this time...





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